Volume 20
Issue 2 Volume 20, Issue 2, 2023 Article 3
12-31-2023
THE CLARITY OF BUSINESS MODELS IN INTEGRATED THE CLARITY OF BUSINESS MODELS IN INTEGRATED ACCOUNTING REPORTS
ACCOUNTING REPORTS
Gabriel Donleavy
University of New England, Australia, [email protected]
Follow this and additional works at: https://scholarhub.ui.ac.id/jaki
Part of the Accounting Commons, and the Business Analytics Commons Recommended Citation
Recommended Citation
Donleavy, Gabriel (2023) "THE CLARITY OF BUSINESS MODELS IN INTEGRATED ACCOUNTING REPORTS,"
Jurnal Akuntansi dan Keuangan Indonesia: Vol. 20: Iss. 2, Article 3.
DOI: 10.21002/jaki.2023.09
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Jurnal Akuntansi dan Keuangan Indonesia Volume 20 Issue 2 December 2023
THE CLARITY OF BUSINESS MODELS IN INTEGRATED ACCOUNTING REPORTS
Gabriel D. Donleavy
Accounting and Business Ethics, University of New England, Australia [email protected]
Received: 16 September 2023; Revised: 29 November 2023; Accepted: 30 November 2023 Abstract
In this study, 664 students enrolled in accounting theory courses at both the undergraduate and postgraduate levels at the University of New England were tasked with the assignment of critically assessing the decision usefulness and understandability of 2 to 4 integrated accounting reports. A key aspect of their analysis involved a critical examination of how the accounting reports conveyed the business models employed by the respective companies. In the case of consolidated reports, students were expected to observe distinct business models for each segment of the group or identify a robust rationale if only one model was presented.
A team comprising both students and faculty examined all submitted reports, coding the embedded models for their complexity and understandability. The ensuing analysis revealed three distinct clusters of models, categorized as simple, orthogonal, or spread. The decision usefulness of these models exhibited significant variation and demonstrated a clear association with their understandability. Given that South Africa is the sole country mandating integrated accounting, a distinctive expectation was formed. Reports from South African corporations were anticipated to exhibit a degree of isomorphism or clustering around a specific model to a notably greater extent than reports from other countries.
However, contrary to expectations, no such clustering was identified. Furthermore, it was anticipated that students would more accurately code simple business models, given their inherent simplicity and ease of comprehension. This expectation found substantial support in the results. Finally, the study hypothesized that spread models would be more prone to being cluttered by extravagant claims, messianic declarations, and legitimation discourses compared to simple models. This hypothesis received confirmation through the study's findings.
Keywords: business models, integrated accounting, value proposition, understandability, value creation.
INTRODUCTION
This paper draws upon the author's extensive experience in instructing eight consecutive cohorts of accounting majors at both undergraduate and postgraduate levels, specifically focusing on a unit dedicated to accounting theory. A recurring element of the coursework involved the critical evaluation of integrated accounting reports, necessitating students to explain and appraise the disclosed business models.
Notably, this aspect of the assignment consistently presented challenges.
Consequently, the author undertook a comprehensive analysis of all reports to discern the extent to which inherent complexities in the reports contributed to students' misunderstanding, confusion, and dogmatism. The significance of using accounting students to represent users of integrated reports is consequential.
Suppose students specializing in accounting theory struggle to comprehend business model descriptions. In that case, it is reasonable to infer that users without specialized knowledge or training would encounter even greater difficulties, potentially rendering the information content of reports virtually negligible.
It was found that the firms themselves varied enormously in the clarity and neutrality with which they presented their business models. Despite the existing stipulations from the International Integrated Reporting Council (IIRC), these guidelines lack enforceability, precluding the characterization of such norms as 'regulations' at this stage.
The main problem identified pertains to the opacity of business model depictions in integrated reports, particularly when these models deviate from the simplicity outlined in the IIRC's definition.
Consequently, this paper introduces a user- friendly taxonomy derived from the reports, aiming to aid readers in assessing a firm's comprehension of its business model and its ability to communicate it clearly to stakeholders.
While existing literature has offered numerous attempts to explain and classify business reporting models, along with the construction of taxonomies for business models, this paper's distinctive contribution lies in distilling an accessible, user-friendly taxonomy directly from the reports. The practical implication of this effort is to report users in evaluating the decision usefulness of business model descriptions in the reports they engage with. If the model is a ‘spread model’, users may choose to disregard it; if it is a ‘simple model’, users can regard it as possessing valuable information content.
LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT
General Overview
There are a few theories linking accounting to business environment, strategy, communication, and accounting that could be relevant to communicating business models. Stakeholder theory, in its normative aspect, asserts that firms prosper most in the longer term and consciously digest the needs of all stakeholder groups in their strategic decisions. In its positive aspects, it asserts that the actual influence of any one group is a function of its power, legitimacy, and proximity (Freeman et al.
2018). These constructs lack any generally accepted metrics, and that means that stakeholder salience cannot be well assessed. Such salience may be affected by perceptions of the relative strength of different groups in the value chain that sustains the business model. However, it is difficult to test any hypothesis that the depiction of the model itself affects salience in any detectable way.
Legitimacy theory asserts that a society allows professions, associations and corporations should be allowed to regulate themselves rather than have regulation imposed by the State so long they rate the public interest as the major factor in driving their decisions. (Dowling and Pfeffer
Figure 1
The Circular and Iterative Nature of the CBMIP
1975). Clear disclosure of the nature of their business models is perhaps a small part of discharging the duty of accountability to the public interest.
However, it is too small a part to be material to this paper.
The institutional theory asserts that the groups just listed tend to become more alike in their management and structure by processes collectively known as isomorphism (Di Maggio and Powell 1991). The theory also coins the term
‘decoupling’ to describe the divorce of actions from words, which is exemplified in greenwashing and in mission and vision statements not backed by congruent action.
Business models would tend to converge under isomorphism within the same industry. However, their clarification would only do so if users of reports were sensitive to this particular feature of the business reported. There is no evidence in the literature of any such sensitivity.
Disinfographics: Communicating Confusion Beyond Words
Davis et al. (1982) argued that accounting theorists and researchers shape and understand organizational reality by means of images. Indeed, some studies
have critically explored the use of visual images. Preston et al. (1996) explored the significance of several selected visual images in US reports in the 1980s and 1990s. Their analysis of the image’s illustration draws on Baudrillard's (1983) four successive phases of images: 1 - a reflection of a basic reality; 2 -masks over a basic reality; 3 – masks over the absence of any basic reality; and 4 - images perceived to constitute rather than represent reality (Preston et al. 1996).
Bohman (1979) models the insurance business with two equations, thereby providing a rare and very early example of a business model erected with strict regard to the conventions of neoclassical economics and its liberal use of diagrams and graphs to convey its major concepts.
Although most business models elsewhere are words, a few are words and pictures.
Unfortunately, the pictures are generally so complex and multicoloured that they are not easily reproduced for a paper like this.
One exception is the picture in the Wikipedia definition of business model, which is reproduced below as Figure 1.
This picture, like the more complicated versions to be found in many integrated accounting reports of the last
half-decade, cannot readily be judged effective in giving a sharp and clear insight into the model, plan, strategy, market stance, value proposition or brand profile of the issuing firm.
Studies of graphical disclosure and visual design in annual reports, done around the same time as Preston’s, find evidence of presentational management to present the corporate image in as favourable a light as possible (Steinbart 1989; Beattie and Jones 1992a, 1992b; 1997a; 1999; Graves et al.
1996; McKinstry 1996; Mather et al. 1996).
There are no studies in the accessible literature on infographics (or visuals, more generally in company reports) which show their use to have been neutral, modest, or self-critical. It would be tempting to suspect that the mere presence of a graphic illustration of a business model in a company report is prima facie evidence that legitimacy theory is a fair explanation of the disclosure. They are widely used in integrated reports to depict a business model but almost never do so to simplify the complex processes involved in value creation.
Studies of Sustainability-Driven Reports Prior studies that analyze links between strategy, sustainability and accounting include Schalteggar (2012), Schalteggar et al. (2014), Aras et al. (2018), and Adhariani and Du Toit (2019). Others such as Shehata (2014) show that firms are apt to signal their legitimacy by disclosures in their annual reports
Anis et al. (2023) Propose a way to accelerate financial support for transitioning to a low-carbon circular economy, featuring a sustainability governance model and index. Previous studies had used a corporate governance index using a simple scoring technique of a binary scale where strict governance is scored as either present or absent. Their study combined a balanced scorecard with the triple Is of intention, integration and implementation to construct their strategic
governance model. Building it through the step-by-step innovation model used by Schoenmaker (2017) holds that sustainable governance practices take as input the issues deemed salient input by the banks, then process through their application of solutions to produce outputs shareholders’
reaction to the foregoing.
Schalteggar et al. (2014) and Dyllick and Muff (2016) discuss changes in business models and corporate accounting and reporting when firms adopt sustainability but do so at a higher level of abstraction than the models themselves.
Eccles et al. (2012) developed an identity and cultural model of sustainable company creation. They studied the organizational models of companies they judged to be sustainable and compared them with the models of companies they judged to be traditional. Leadership commitment and employee engagement were significantly different, but these associations do not imply a direction of causation.
Schalteggar (2012) classified corporate reports into five relevant to strategic reporting:
1. Trust Me, in which no external report is done, and internal communication is within normal operational practices
2. Tell me where PR concerns drive reporting
3. Show me where responses are made to outside needs, requests, and regulations for accounting
4. Prove to me where information is spontaneously and voluntarily disclosed beyond that necessitated by regulation and 5. Integrate me, which involves stakeholders in jointly developing strategy, communication and reporting on an ongoing and systematic basis.
The paper now surveys the literature for the work most relevant to understanding the actual significance of the clarity of business models.
Previous Studies of Business Model Reporting
Burns and Stalker (1961) founded contingency theory, which postulates that organizations operating in stable environments could do so by successfully hosting hierarchical, bureaucratic,
"mechanistic" structures, those in the volatile technological and market environment of the infant computer industry in the 1950s and 1960s, were successful only if their structures were decentralized, flexible and "organic”. This was the birth of the notion of a business model (Green 2005). Hamal and Prahalad (1994) were some of the first influential writers to declare the importance of the business model in conferring competitive advantage.
Although Smith and Tushman (2005) clearly argued the usefulness of their model for managing innovation strategies, Amit and Zott (2012) report a survey of more than 4,000 senior managers by the Economist Intelligence Unit. They found that the majority (54%) preferred to see new business models rather than new products and services as the major source of future competitive advantage. New business models could be signified by adding new activities, by linking activities in novel ways or by replacing one kind of member of the supply chain with another.
Thomsen (2019) claims that since 2000, 14 of the 19 new entrants to the Fortune 500 “owe their success to business model innovations that either transformed existing industries or created new ones.
However, “Overall, most research on business model archetypes so far appears less systematic and seems to be based on a few selected case examples supporting the narrative of obvious successful business models” (a view supported by Christensen and Johnson 2009; Fielt 2014; Taran et al.
2016). A recent exception is Anis et al.
(2023), who address the contingent fit of contextual factors, sustainability innovation and unit business performance in their extrusion of a model from empirical
evidence. Business models are relevant in their study but are not themselves analyzed into taxonomic categories. Osterwalder (2004) asserts that the formulation and discussion of business models create a common language to improve understanding of the fundamental questions of a business.
Komorowski (2016) blames fashion for declaring business models as a factor facilitating the financialization of the whole economy. It serves, he argued, to distance the stock market from the real dimensions fof business, the opposite of what was intended by its creators.
Weill et al. (2004) define a business model as consisting of two elements: (a) what the business does and (b) how the business makes money doing those things. Huelsbeck et al. (2011) characterize business models as management rationales as to how their organizations will achieve success. Unfortunately, however, definitions of a business model have been contested since they began to appear (Heuskel 1999; Camison 2001; Schweizer 2005; Morris et al. 2005; Zott and Amit 2007; Zott et al. 2011; Massa et al.; 2017).
Although there is no generally accepted agreement about the meaning of the business model, there are certain common elements in many versions, according to Flamholtz and Randle (2011, 2012): - i) Target markets.
ii) Value creation for the enterprise and its stakeholders; and
iii) Delivery processes, a key component of which is corporate culture.
They cite Barney (1986, 1991, 2002), to support their argument. However, it can be argued that the three elements overlap and interact with each other rather than functioning as independent and distinct factors, leading to confusion rather than clarity. Many scholars (Hamel 2000;
Chesbrough and Rosenbloom 2002;
Shafera et al. 2005; Zott and Amit 2008) consider strategy as a core element of a business model. On the contrary, for some (Osterwalder et al. 2005; Casadesus-
Masanell and Ricart 2010), the business model and business strategy are entirely different concepts. Others assert that the model is not a strategy but incorporates strategic decisions (Morris et al. 2005;
Patzelt et al. 2008). It is neither structure nor value chain but includes both (Camison 2001; Schweizer 2005). The model is more than the sum of its parts (Morris et al. 2005, 2006). The scholars mentioned in this paragraph often conclude their articles by noting that there is no single superior business model. Magretta (2002) asserts that a good business model answers “Peter Drucker’s questions, ‘Who is the customer?
And what does the customer value?’” and adds her own inquiries: - ‘How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?’
Henriques and Peças (2013) assert that the act of conceiving a business model implies choosing some specific competitive strategy to drive the mission and value proposition, target market, revenue, and pricing aspects.
The term ‘business model’ is used in many places, from integrated accounting reports to the daily columns of the financial press. It is a lucky coincidence if its meaning in one context maps well to any other context. We need help in driving through the fog. We may begin by returning to the originator of modern rational classification, Linnaeus.
Carl Linnaeus sets forth the oldest and arguably most authoritative taxonomy system in his magnum opus, Sistema Natura. He established three kingdoms for the natural sciences: animal, vegetable, and mineral. Kingdoms are divided into classes, classes into orders, then genera, then species, in descending order of generality.
In Linnaeus, species are arranged in a hierarchy according to common, inherited characteristics. For example, all vertebrates are distinguished by a common characteristic, that of having a backbone.
Different orders and phyla are
distinguished by common properties such as whether they bear live young and so on.
At the top of the Linnaeus taxonomy is the common class of 'Living Thing', which has characteristics that are common to both animals and plants. This is a set of which every living thing is a member.
Similarly, at the top of any ontology is the common class, which is the set of which everything is a member. The Linnaean taxonomy has near-universal scientific acceptance (Polaszek 2010), and it is, therefore, a sound exemplar for framers of any taxonomy of business models. (Bennett 2013)
What is the class of things of which the business model is a member? Is the business model directly observable, like an office, a document or petty cash? No. Is it derivable from closely following a set of arbitrary but authoritative rules such as those which once applied to the idea of net operating profit in the period before the adoption of the statement of comprehensive income with its fudging of the old borders separating capital from revenue? Yes, but there is no authoritative equivalent of the accounting standards board to impose coercive isomorphism on the users of the term business model so far.
Some writers have tried to induce a taxonomy by techniques such as cluster analysis, but the results have lacked predictive power and had contexts and limitations that made them difficult to replicate (Camison and Vilar-Lopez 2010;
Groth and Nielsen 2015). Other writers have proposed model taxonomies a priori and sought to show they had explanatory power for business success and failure (Al- Debei et al. 2015; DaSilva and Osiyevskyy 2019).
Alternative formulations of a business model are available. Ovans (2020) says the business model of most Internet companies is to attract huge crowds of people to a website and then sell others the chance to advertise products to the crowds.
Investopedia is a frequently utilized resource, particularly among students.
According to Kopp (2019) in Investopedia,
“A business model is a company's plan for making a profit. It identifies the products or services the business will sell, the target market it has identified, and the expenses it anticipates.” In conclusion to this section, it is noteworthy that the existing literature did not offer the present writer a focal study pertinent enough to serve as a template or starting point for this specific study.
Nevertheless, each of the cited works contributed to an enhanced understanding of the context.
RESEARCH METHODS EMPLOYED IN THE STUDY
Models and Students
The International Integrated Reporting Council [IIRC] was the leading authority for integrated accounting until it was taken over by the Value Reporting Foundation, which was, in turn, taken over in 2022 by the International Sustainability Standards Board, a subsidiary of the International Accounting Standards Board.
The IIRC (2013) glossary thus defines a business model, as extracted from its’
International <IR> Framework 2: “An organization’s system of transforming inputs through its business activities into outputs and outcomes that aims to fulfil the organization’s strategic purposes and create value over the short, medium, and long term.”
Unfortunately, the integrated accounting reports collected and examined by the writer’s 664 accounting theory students from around the English-speaking world show that the IIRC’s definition of a business model is widely ignored. Perhaps the term “business model” is a member of a class of neologisms with a common legitimating purpose but with no fixed meaning, either connotative or denotative.
This aqueous class of terms arguably includes the following: - value proposition, sustainability, public interest, stakeholder, governance, business ethics, and decision
usefulness. What distinguishes the business model from other members of the class is its widely claimed criticality for business success, its divisibility into components of which some notion of output or market is always included and its implication of deliberate managerial focus. Thus, there cannot be an accidental business model.
Mens rea (guilty intention) is a prerequisite, just as it is for any criminal culpability in common law jurisdictions. Of the many possible ways of categorizing business models, it is proposed to apply Occam’s Razor and keep it as simple as possible. To do that, we do not go down the path of designing or collecting models from different industries, different epochs, or different technologies. Instead, we can characterize all business models, past, present, and future, in only three ways.
First and clearest is the narrow input-process-output formulation that the IIRC uses.
INPUTS MONETIZING
PROCESSES OUTPUTS
This is the simple business model.
Between these two types of models is the orthogonal model. This is the simple model with extra dimensions such as a value proposition, a strategic summary, or a metaphor of the input-to-output transformation. Unlike the spread model, the orthogonal model has precisely delineated boundaries for its extra ingredient/s.
ORTHOGONAL BUSINESS MODELS (INPUTS PROCESSES OUTPUTS) + STRATEGY OR OTHER SINGLE FACTOR
Orthogonal Business Models
Flamholtz and Randle (2012) argue that corporate culture is a strategic asset, indeed, the key differentiating factor in a successful business model. They view
corporate culture as a major component of overall human capital, which cannot easily be copied across organizations. “It is not possible for an organization to have no culture, just as it is not possible for a person to have no personality” (Flamholtz and Randle 2012).
Shafera et al. (2005) developed an affinity diagram to organize business models cited components into categories.
They recognized four primary classifications: creating value, capturing value, strategic choices, and value network.
The initial two suggest the cultivation of core competencies that offer a degree of distinctiveness from competitors. Both are situated within a value network. The role a company opts for within a value network is a crucial component of its business model.
The business model serves as a structural framework detailing how a central firm engages in transactions with external entities in both factor and product markets (Zott and Amit 2008). These three views are orthogonal. The value-creating elements in the model are strictly delineated but include more than the inputs, processes and outputs of the simple model.
SPREAD BUSINESS MODELS
SCHEMATIC DIAGRAM (INPUTS PROCESSES
OUTPUTS) + STRATEGY + OTHER FACTORS + CLAIMS
The spread type of model is the model that includes strategy and a range of other things, at least one of which is vague, fuzzy, or multi-dimensional. Inherent in the notion of a spread model is that there will be many variations of its detailed or operational definition. Next are some of the most prominent in the literature.
The ICAEW (2010) argues that the business model of an entity is shaped by its internal activities, serving as a connection between theoretical aspects of the firm and their practical application to financial reporting for individual companies. The IASB (2010) outlines five elements in its
interpretation of the business model for financial entities:
i) The nature of the business.
ii) The management's objectives and strategies for meeting those objectives.
iii) The entity's most significant resources, risks, and relationships.
iv) The description of the results of operations and prospects; and
v) The critical performance measures and indicators that management uses to evaluate the entity's performance against stated objectives.
Osterwalder (2004) has formulated a business model consisting of nine components. These encompass not just the essential resources and activities within the firm's value chain, but also its value proposition, customer relationships, channels, customer segments, cost structures, and revenue.
Weill et al. (2011) developed a framework classifying business models into 14 types, dependent on the kind of business and industry that fits best. Although Cavelaars and Passenier (2012) characterize a business model for banks as a simplified depiction of the activities undertaken by a bank to generate revenue.
They further state that a business model should address questions such as:
What types of products and services does the bank provide, and for which demographic or customer segments?
i) How does the bank intend to engage with customers and deliver its products and services?
ii) What factors contribute to the bank's profitability, and is this profitability sustainable?
iii) In approaching customers and delivering products and services, does the bank prioritize relationship banking or transactional banking?
The above paragraphs depict spread business models. Their elements have fuzzy boundaries. They include items impossible to quantify, and subjective self-appraisals unanchored in any evidence.
We now address the research process itself. The Research Question is – demonstrably useful to financial decision- makers. The question is addressed through three operational hypotheses, namely:
H1: There is a significant association between model simplicity and users’ ability to engage with the description of the model
H2: There is a significant difference between models described in reports where integrated accounting is compulsory from reports produced in the results of the world
H3: There is a significant association between the prevalence of wild claims in reports descriptions of business models and users’
detection of them.
Selection of Reports and Students
Student coders were selected based on their understanding of business models assessed through interviews. Reports were chosen from those used by students in the author's accounting theory course assignments, aiming for a diverse representation of model types and a balanced mix of South African and global reports where integrated reporting was not mandatory. This selection process was done impressionistically due to the lack of known proportions for the entire population of integrated reports.
The coding process involved three doctoral accounting students, a staff colleague, and the author, who collectively coded 120 reports into three categories.
Inter-rater reliability was assessed using the SPSS variant of Cohen’s (1960) kappa as designed by Siegel and Castellan (1988), yielding a mean reliability of 72% for one set and below 60% for the other two. Both those fall within the acceptable reliable range for Krohnbach’s alpha and a fortiori for Cohen’s kappa here (Clarke and Watson 1995). The set with 72% reliability, listed in Appendix 1, was chosen for further analysis.
The study considered the potential differences between reports from countries where integrated reporting was mandatory and those where it was not. In South Africa, the only country with compulsory integrated reporting, penalties can be imposed for inaccurate or inadequate reporting of business models. Their reports, potentially favoring the simple form of business models over the spread.
Data Capture
For each of the three model types, a note was then made of the presence of large claims not supported by the evidence available in the report or clearly aspirational, such as “to be the best supplier.” (H1).
The note was made of the numbers of each company that students had been able to extract and communicate a reasonably true and fair picture of the business model. The counts were then transformed into percentages in each set such that over 50% of all the students correctly classified the reports. (H3)
Coding
The coders had no strict coding checklist or directives. They were briefed on the notion of models being of three types: simple, orthogonal, and spread and asked to code the models in the reports accordingly. There were oral debriefings after the exercise in each case, but there was no requirement to provide a written rationale. No assumption or implication of objectivity in the act of coding was made, but it was possible to show reasonable consensus of opinion – thus following the advice of Krippendorff (1980) to reduce the ditortions of coder subjectivity by applying cross evaluation of each rating or value judgment.
Reliability
Intercoder reliability passed the commonly used reliability test threshold levels.
Table 1 Hypothesis H1
Distribution of Wild Claims over Model types by percentage of scripts (Very significant)
Type Observed value
o
Expected Value
e
Difference o-e
Diff Squared (o-e)2
Coefficient of variation
(o-e)2/e
The column headings in this table also apply to
the subsequent tables
Simple 22 33 -11 121 3.67
Orthogonal 24 33 -9 81 2.45
Spread 54 33 20 400 11.76
Chi-Squared 17.886
Probability of that Chi- squared
0.00013
Why Only Chi-square?
The ratings were conducted solely on a nominal scale, requiring reports of models to be placed in one of three choice sets. There was no a priori assumption of superiority to the user of the models since it could have been the case that many users would find the extra information in the spread model decision-useful or at least relevantly interesting. This meant that all parametric techniques of analysis were inapplicable and that even the ordinal scale techniques such as the U test were also inapplicable. That only left chi-square as an appropriate measure of association or of fit by the actual numbers to the expected numbers.
Chi-squared statistics were calculated for each of the three hypothesis tests and are outlined in the subsequent three tables.
H1: The wild claims test showed a chi- square test of 17.885 with a p-value of 0.013%.
H2: The mandatory/non-mandatory test showed a chi-square of 2.0 with a p- value of 36.7%.
H3: The student detection of type results showed a chi-square of 13.015 at a p- value of 0.149%.
The results supported two hypotheses, H1
and H3 and offered no support for H2. Accordingly, it was possible to demonstrate
a systematic association between model type and prevalence of wild claims or students’ ability to classify the model but not whether the report was produced in conformance to law or voluntarily. This contrasts with previous studies, which failed to demonstrate any systematic or practical significance of the taxonomies extruded from data or designed a priori.
This may be because previous business model typologies are not capable of being used as an analytical or predictive tool.
This, in turn, maybe because the term
‘business model’ meant too many different things to too many different people.
However, the term has shown a certain degree of isomorphism since its emergence thirty years ago as an allegedly critical ingredient of business success.
Significance of Results and Implications What, then, is the use of the threefold classification of business models?
It enables us to deconstruct the term
‘business model’ whenever we see it in a report. If the model is simple, we will swallow it whole while retaining our critical faculties in judging claims about how the model has been applied. The same goes for the orthogonal model, except that here, we will first have to become convinced that each element in the model is defined with plausible construct validity and empirical verifiability. When, however,
Table 2 Hypothesis H2
Distribution of Model Types between Mandatory (O) And Other Jurisdictions (non-significant)
Type o e o-e (o-e)2 (o-e)2/e X sq &
Prob
Simple 10 13 -3 9 0.69
Orthogonal 12 13 -1 1 0.08
Spread 17 13 4 16 1.23
Chi Sqr 2.0
Probability 0.3678
Table 3 Hypothesis H3
Distribution of >50% Students Correctly Detecting Type Across Model Types by per cent of the sample
(Very significant)
Type o e o-e (o-e)2 (o-e)2/e X sq &
Prob
Simple 23 33 -10 100 3.03
Orthogonal 26 33 -7 49 1.48
Spread 51 33 17 289 8.5
Chi sqr 13.015
Probability 0.00149
we judge that what is before our eyes is a spread model, we will be able to disregard it as contributing nothing to the enterprise’s success, possibly a small amount to its legitimacy, and usually nothing at all to its decision usefulness. In Schaltegger’s (2012) terms, the spread model aligns with the PR-driven “show me” level.
CONCLUSIONS
Summary
This paper draws upon the experience of teaching eight successive cohorts of accounting majors. The study reveals substantial variations in the clarity and neutrality with which firms presented their business models. The paper reports the patterns observed in these business model presentations. It was expected there would be a significant difference between models in reports issued in countries where integrating reporting has been mandatory, especially South Africa, and purely voluntary reports. Surprisingly, no general systematic differences in the clarity or
simplicity of business models were found between these two contrasting disclosure regimes.
Additionally, the study confirmed the expectation that students would more accurately code simple business models than other types. Finally, it was expected that the spread models would be more cluttered by wild claims, messianic declarations and legitimation discourses than simple models. This was strongly supported.
In line with Verstraete and Jouison (2019), who posit the business model as "a myth that has been institutionalized by a collective group of stakeholders," this study aligns with the perspective of the business model as an icon. The study underscores the importance of intelligibility for organizational emergence, emphasizing that potential partners are unlikely to commit resources to a project they do not comprehend. Consequently, this study supports the view of the business model as a myth. However, if genuine understanding is a prerequisite for potential partners, the study suggests that firms seeking collaboration should streamline their
business models, eliminating the verbosity often associated with spread models.
Limitations of The Research
The limitations of this study are apparent. Firstly, the external validity is constrained by the fact that the subjects are Australian students enrolled in an accounting theory course. This unidirectional limitation implies that what these students may struggle to comprehend in accounting reports, the majority of other report users would likely find even more challenging. Secondly, the representativeness of integrated reports is limited. Various other corporate reports, such as the compulsory annual financial report, also incorporate descriptions of business models in many instances. It is plausible that these other reports depict business models in a manner different from the distribution observed in our restricted sample of integrated reports. Thirdly, there might be a selection bias in the choice of reports or subjects, as the former was constrained by availability, and the latter was influenced by volunteer status.
Consequently, the findings of this study would need replication in other countries, with different user cohorts, and using all types of reports featuring business models before any safe generalizations may be ventured.
Five Future Research Suggestions
1. Conduct empirical surveys targeting users, preparers, and financial managers to understand their requirements for ideal business model descriptors and gather their views on existing models.
2. Investigate the reasons behind the absence of significant differences in the depiction of models in South African reports, where they are mandatory, compared to reports from other regions.
3. Test existing taxonomies from sustainability literature against real- world business models.
4. Replicate the current study with different cohorts of subject.
5. Select one of the existing taxonomies from the literature, choose reports from distinct economic sectors, and systematically test the taxonomy against them sector by sector and overall.
Policy Implications
Regulatory authorities such as ISSB should prioritize extracting a consensus from the financial community regarding the nature and essential elements of a business model. Authoritative guidelines or standards should be derived from this exercise. It should distinguish a value chain from a business model, understand monetization versus input-process-output analysis, and distinguish factors driving sales growth from those maintaining profit margins. This includes explaining the concept of price elasticity of demand and its impact on the business model to a new generation of users.
Report users should apply the findings of this paper to enhance their reading of reports. They can distinguish between decision-useful simple models and the more promotional ("show me") spread models. While orthogonal models may resemble simple models with an extra element in some cases, they can also be more akin to spread models with an excess of elements, making it challenging to shed light on a company's value-creation processes.
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APPENDIX
REAL-WORLD BUSINESS MODELS
In this appendix are the companies in the final set, the set where the intercoder reliability was highest at 72%. The name and year of each company report are given, along with a brief explanation of its placement in its model category. South African reports are asterisked *
10 SIMPLE MODELS
1. Anglo American Platinum 2018 Input process output clearly described
Only Puff says, “Our people are the business. We aim to resource the organization with a capable, engaged and productive workforce and are committed to ensuring to ensuring no harm comes to any of our people”.
2. Barclays Africa 2017
The business model describes simply value created by providing services to individuals, companies, and sovereigns [sic].
Relates capital types to client uses, e.g., meeting regulatory requirements or developing risk- controlled profitable opportunities
3. Coca Cola HBC 2017
Clear relating of inputs to outputs, followed by showing the (verbal) value of each of the six capitals.
No puff claims.
4. Arcelor Mittal 2018
SA’s main steel producer describes what it does clearly with little puff.
5. M&S 2016
Resources and relationships are then described as sub heads of the six capitals. Activities are listed by product and service groups and what keeps them in the Simple group is that each activity set incudes supply chain information is followed by a corresponding outcome set.
6 and 7 Rio Tinto 2017 and 2018
“We create value through the way we find, develop and operate these assets, how we market the minerals and metals they produce, and the legacy we leave at the end of their lives.”
Several paragraphs take reader from exploration through extraction to refining and selling.
Major events at the main locations are described under the heading “business model in action”, such as remediation work at the long disused Holden copper mine in Washington State.
8. Sanford NZ 2017
Seafood business with the six capitals both as input and output. Although there is also some puff such as: - “we will lead the way in driving sustainable performance across our value chain and positioning our brand as the industry partner and supplier of choice., it is not in the business model section of the report.
9. Kumba 2017
Business model has bullet point lists of revenues, processes and “inputs and resources, including (but not centring on) a value proposition for each stakeholder group. Iron ore mining
and processing is a major part of business and that seems to facilitate a simple business model presentation.
10. United Utilities UK 2019
Capitals, stakeholders, and regulatory environment neatly partitioned and the constitute lists are appropriate for the headline descriptions. Neat simple sentence of the model – “We provide essential water and wastewater services to millions of customers every day, and our workplaces us at the heart of the communities in the Northwest of England.” Stated elsewhere in report as
“the best service to customers at the lowest sustainable cost in a responsible manner.”
ORTHOGONAL MODELS 1. ANZ 2018
Partitions by type of banking and states an overall value proposition
Claim “Building an ethical, inclusive, zero harm, customer centric and high-performance culture”
2. Dexus 2019
Creates value through operational focus on “leasing, funds management, development management, customers and sustainability”
Partitions by managing, developing, and transacting activities
3. Air Traffic Navigation Services SA 2014
Describes simply its SA air traffic navigation services and its state ownership
The model, then however, includes strategy, and claims it “provides passengers, airlines, tenants, and visitors with the best airport experience”.
4. BHP 2019
Partitions by type of operation, exploration, development, extraction, processing, rehabilitation, and closure.
Claim “We have a responsibility to produce strong commercial, sustainable and social outcomes for our shareholders, communities and society. This has inspired us to refresh our purpose to acknowledge people as the driving force behind our achievements and reflect our broader contribution.”
5. Sasol 2018 (SA)
“Through our talented people, we use selected technologies to safely and sustainably source, produce and market chemical and energy products competitively.”
“Our integrated value chain, centered on our gas-to-liquids, coal-to-liquids and chemical processes, is at the heart of our differentiated value proposition.”
6. NAB 2019
Whole page tabulated diagram “How We Create Value” across the capitals with activities next to the each one and then a rationale alongside which does not wholly align with the way the first two columns are partitioned.
7. Standard Bank 2016
Identifies 5 value drivers including client focus, employee engagement, creating value for society, social relevance. Orthogonality across stakeholders.
“As a financial services organization with a broad offering of products and services, our goal is for all of our business units and corporate functions to work together to seamlessly deliver
on our clients’ financial needs.” Inputs and outputs for each type of operation clear. Same for disposition of the six capitals.
8. Unilever 2018
Has a value creation model with a diagram mixing capitals and stakeholders as inputs, intangible and environmental benefits coming out and a circular splodge of strategic buzzwords in between. Words on same page much closer to a simple model than the diagram is.
9. Royal Bafokeng Platinum 2017
Each of the six capitals as input gets its own section followed by its effect on activity and outputs and/or revenue, but model itself is not condensed into a simple few sentences.
10. Truworths 2019 (SA)
Trade-offs across the six capitals in creating value are tabulated.
“As a fashion retailer the group’s business model is to procure merchandise from third-party suppliers and to sell it to consumers for cash or on account through its network of retail stores and e-commerce platforms. The group’s purpose is to provide exclusive and aspirational apparel brands to youthful fashionable consumers.”
Brief list of value creating activity then a list of “differentiators” such as “industry leader in the field of big events”. Example activity statement is “The group’s food and beverage offering provides something for all food lovers – from fine dining to take-away options and everything in between.”
11. Woodside Petroleum 2018
“Woodside’s business model seeks to maximize the value of its portfolio across the value chain…by utilizing our…drilling capabilities and by deepening relationships in LNG markets…”. Sections for activities follow – Acquire, Develop, Market, Decommission and divest.
12. Vodacom Africa 2017
“We secure access to spectrum, invest in mobile and fixed telecommunications infrastructure, develop and distribute products and services tailored to our specific market segments, and run a strong customer care and brand programme.”
Claim that generating value the way they do is “empowering the digital lives of our customers and connecting everybody to live a better today and build a better tomorrow.”
Value chain activities are described in numbered sections ending with no 6, managing our brand and reputation.
“We generate profit by efficiently utilizing mobile fixed connectivity [sic], cloud and hosting and fixed-line assets to provide our consumer and enterprise customers with valued voice, data, messaging, and related services.”
SPREAD MODELS
[Companies with no explicit statement of a business model at all but with many words covering the same notion]
1. Asahi 2018
No explicit model. Much on value creation and strategies 2. Johnson and Johnson 2017
“United by a common purpose: to change the trajectory of health for humanity”
